Author Topic: Portfolio 60/40 in danger  (Read 1061 times)

imolina

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Portfolio 60/40 in danger
« on: October 27, 2020, 05:06:01 AM »

I was watching this video and the guy says the 60/40 portfolio is at risk due the bubble in stocks and bonds. 
It is an interesting video, but I think the 4% rule has been tested since 1926, so his argument is not right, is it?.  What is your opinion?.

https://www.youtube.com/watch?v=a-u9ZWEZlC4
« Last Edit: October 27, 2020, 05:14:34 AM by imolina »

UnleashHell

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Re: Portfolio 60/40 in danger
« Reply #1 on: October 27, 2020, 07:21:01 AM »
the world is ending
big HEADLINES
everything to zero.
let me show you how to avoid it by giving me money for info thats free and unbiased already on the internet.


so i'm calling bullshit.


cool7hand

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Re: Portfolio 60/40 in danger
« Reply #3 on: October 27, 2020, 07:41:36 AM »
If you would like a little more protection against bubbles, take a look at Ray Dalio's All Season's Portfolio (aka All Weather Portfolio).

maizefolk

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Re: Portfolio 60/40 in danger
« Reply #4 on: October 27, 2020, 07:50:07 AM »
Hyper bubbles! GFCs! Cervaza sickness!

The 4% rule has been tested back to 1870. It does fail sometimes (1966 was a bad year to FIRE, as were 1965 and 1969) if you don't have any flexibility at all. But you almost certainly do have at least some level of flexibility.

If you are feeling stressed or worried, I highly recommend Go Curry Cracker's post on the "Worst Retirement Ever" which walks you through what it was like like for a hypothetically FIREee who pushed the big red button in 1965.

Personally I find thinking about the worst case in detail quite reassuring because it's just not that bad as worst case scenarios go.

ChpBstrd

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Re: Portfolio 60/40 in danger
« Reply #5 on: October 27, 2020, 09:37:44 AM »
It’s all about the spread between portfolio returns and inflation.

If portfolio returns are less than spending plus annual inflation then the portfolio will decline. There should be no argument on this point. It’s just math.

Will it decline fast enough to be exhausted (or to force you into poverty-level spending habits and insomnia late in life)? Depends on your specific assets and number of years in retirement. There is a relationship between length of retirement and portfolio survival odds.

There’s also the issue of how a portfolio containing bonds can possibly keep up if inflation exceeds the coupon rate on the bonds. E.g. if 40% of your assets are 20y treasuries yielding 1.3% and inflation surprises everyone and reverts to its mean of 3% for the next 10 years, your WR in year 10 is 5.3% of your original portfolio value and yet you have a bunch of these bonds yielding 1.3%. Plus they’ve deprecated massively due to presumably higher interest rates.

If you think stocks would save the portfolio in such a scenario, consider how stocks have historically done when interest rates rise.

Some might say this scenario is unlikely because inflation has been falling for so long despite all the QE and monetary expansion. But if the odds of returning to normal inflation are 10% that would be the baseline failure rate of a 60/40 portfolio, *before* we factor in the risks of poor stock returns. If we say “don’t fight the Fed” on falling interest rates and QE, why question their competency when they say they will engineer inflation to overshoot 2%?

joleran

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Re: Portfolio 60/40 in danger
« Reply #6 on: October 27, 2020, 03:35:13 PM »
I personally came to the conclusion that traditionally safe government treasury bonds do not offer an appropriate risk premium (heck, the premium is negative for all but the longest duration treasuries) over high yield savings at current interest rates - if you look at historical periods with very low interest rates bonds also did not do well there.  So I keep my current "bond" allocation in mostly high yield savings plus a sprinkling of alternative investments like precious metals and bitcoin.

terran

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Re: Portfolio 60/40 in danger
« Reply #7 on: October 27, 2020, 04:13:58 PM »
So is he trying to get you to buy gold or bitcoin?

maizefolk

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Re: Portfolio 60/40 in danger
« Reply #8 on: October 27, 2020, 04:26:01 PM »
So is he trying to get you to buy gold or bitcoin?

When I skipped to the end he was arguing for 10% of your portfolio in gold, plus buying a subscription to his special website to tell you want to do with the other 90%.

joleran

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Re: Portfolio 60/40 in danger
« Reply #9 on: October 27, 2020, 04:26:29 PM »
So is he trying to get you to buy gold or bitcoin?

Doesn't look like it, I'm not going to watch the whole clickbaity video but clicking through I see he has a graphic recommending 10% to insurance (not actual insurance but gold I guess) and 10% to "speculative".  Just saying I agree with the premise that holding 40% "safe" treasuries right now would not be something I personally want to do.